GDP up as shoppers fuel economic growth

WASHINGTON -- Splurging shoppers helped the economy hum along faster than first thought in the third quarter, but high energy prices could weigh on consumers in the months ahead.

Gross domestic product -- the value of all goods and services produced within the United States -- increased at an annual rate of 3.9 percent in the July-to-September quarter, the Commerce Department reported Tuesday.

"I think the economy has found its groove," said Mark Zandi, chief economist at Economy.com.

But sinking confidence among consumers raised new questions about their appetite to spend in coming months. The Conference Board's Consumer Confidence Index fell to an eight-month low of 90.5 in November, the fourth month in a row that confidence declined.

The new GDP figure was up from an initial estimate of a 3.7 percent growth rate for the third quarter and was better than a 3.3 percent pace posted in the second quarter.

After adjusting for inflation, the economy grew to $10.9 trillion, on an annualized basis, in the third quarter.

The main reasons for the improvement: stronger consumer spending, which grew at a 5.1 percent pace, the fastest clip since the end of 2001, and more robust business investment in equipment and software. Better growth in U.S. exports also helped.

The International Council of Shopping Centers, meanwhile, trimmed its sales forecast for November, suggesting the buying surge on Friday -- the day after Thanksgiving -- fizzled dramatically as the first weekend of the holiday shopping season wore on.

Sales at stores open at least a year will be up 2.5 percent to 3 percent for the month, versus the original forecast of 3 percent to 4 percent, the group said.

"Consumers are alive and well, but not as lively as in the summer," said Stuart Hoffman, chief economist at PNC Financial Services Group.

On Wall Street, the Dow Jones industrials lost 47.88 to close at 10,428.02.

Hoffman expects GDP to slow to a still respectable 3.25 percent rate in the October-to-December quarter. Others think it could clock in at around a 4 percent pace. In either scenario, though, most analysts don't expect consumers will be as enthusiastic as they were in the third quarter. The GDP report for the fourth quarter will be released in late January.

President Bush and Democrats have widely different views about how the economy is faring and how it should be handled going forward. Looking toward his second term, Bush says simplifying the tax code and overhauling Social Security are two main prongs of his economic agenda.

Treasury Secretary John Snow, pointing to the good GDP news, credited the president's policies with putting the economy "on a steady path of growth."

Yet high energy prices and concerns about the job climate are affecting consumers' feelings about the economy's direction, analysts said.

Crude oil prices hit a record high of just over $55 a barrel in late October. Prices settled at $49.13 a barrel on Tuesday.

And the jobs recovery -- while improving -- isn't as firmly rooted as the economy's recovery.

Employers added 337,000 jobs in October, the most since March. Many of those jobs were for hurricane cleanup. Analysts predict that employers expanded payrolls by around 200,000 in November. The government will release the employment report for November on Friday.

One measure of after-tax profits in the GDP report showed profits shrank by 2 percent in the third quarter from the previous quarter. Analysts said profits were restrained by a string of hurricanes that ripped through the Southeast, high energy prices and slower productivity. But profits are up by 8.1 percent from the third quarter a year ago.

Business spending on equipment and software, however, grew at a sizable 17.2 percent annual rate in the third quarter-- up from the second quarter's 14.2 percent pace.

Encouraged by the economy's performance, the Federal Reserve has raised short-term interest rates four times this year. Analysts believe another rate increase will come at the Fed's next meeting on Dec. 14.